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January 25, 2013

Top 10 Wealth Management Trends for 2013

Aite Group research sees a re-evaluation of firm acquisitions and RIA partnerships, plus regulatory changes and more

The world of wealth management—whether for RIAs, IBDs or wirehouses—changes constantly to keep up with market forces, Washington policy, technological innovation and client demand. Every year brings its own challenges, but 2013 is likely to be an exceptionally dynamic year for change.

“Regulations, business and servicing models, and operating models are all still adjusting to the post-crisis business environment, and the main goal for many firms is to finally be able to kick their wealth management business into gear and once more accelerate growth in this line of business,” the analysts write.

Aite concludes that “a heavy dose of change” will dominate the sixth year following the start of the financial crisis. Although Aite believes that wealth management profitability will continue a flat growth trajectory in 2013, it also predicts that firms will seek to grow either by providing differentiating and revenue-enhancing services to clients or by reducing the cost of serving clients.

1) Operating and Growth Strategies: Acquisitions vs. Partnerships

In 2012, several of the largest U.S. wealth management firms completed acquisition deals, says Aite analyst Sophie Schmitt. For example: Raymond James completed its acquisition of Morgan Keegan, Morgan Stanley finalized a purchase agreement with Citigroup to acquire the 49% of Smith Barney it does not already own, and Cetera Financial completed its acquisition of Genworth Financial Investment Services.

This year, the largest wealth management firms will continue to pursue growth strategies that involve acquiring or building internally, Schmitt predicts, while small and midsize wealth management firms will choose to expand or update their wealth management capabilities through partnerships with their service providers.

“Clearing firms such as National Financial and Pershing, and third-party broker-dealers such as Cetera Financial Institutions, LPL Financial Institution Services and Raymond James' Financial Institutions Division, will continue to see strong business growth in 2013,” she writes.

2) Investment Advice Regs Drive Business Model Changes

The most significant change to the global financial advice industry will take place this year not in the United States but in the United Kingdom and Australia, Schmitt predicts.

As of Jan. 1 in the U.K. and July in Australia, all licensed advisors must move to a fee-for-service model. “Commissions and inducements from product providers will be banned, and advisors can only charge clients an ongoing fee if they provide an ongoing service,” writes Schmitt, who adds that wealth management firms in those countries will concentrate technology and services spending on tools to automate and track service.

In the United States, the proposed uniform fiduciary standard for all financial advisors has a better chance of becoming law now that President Barack Obama has won re-election and pro-investor politicians such as Sen. Elizabeth Warren have been nominated to key financial services regulatory roles, Schmitt believes.

“We expect the Securities and Exchange Commission to draft a proposed fiduciary standard rule by the end of 2013,” she writes. “This effort will accompany (though not necessarily mimic) a Department of Labor proposal to extend the scope of ERISA's fiduciary standard to all financial advisors when they give advice on 401(k) plans to their own clients or to employees through worksite visits. Implementation of both the SEC standard and the DOL enhanced standard is likely to take place in 2014 or 2015.”

3) RIAs Reach for Greater Efficiency

”The registered investment advisor market has been one of the big success stories in the U.S. wealth management industry since the start of the 2008 financial crisis,” write Aite analysts Bill Butterfield and Alois Pirker in the report. “RIAs have been able to take between 0.5% and 1% of market share annually from other wealth management industry segments over the last five years.”

However, RIAs' small size means challenging operational efficiencies, Butterfield and Pirker say. “Two-thirds of independent RIAs estimated the level of technology integration across their business applications to be 50% or less,” they write.

On a positive note, Butterfield and Pirker predict that RIAs’ technology and operations disadvantages could soon be a thing of the past due to web-based technologies and software-as-a-service practices.

“A diverse set of firms―ranging from custodians like Fidelity Investments, Charles Schwab and Pershing to broker-dealer firms like LPL, Raymond James and National Financial Partners (NFP) to technology players like Advent Software and Morningstar―have all been investing in technology platforms targeted at RIAs,” they write.

Advisor succession planning will be a top issue for the foreseeable future, say Pirker and Schmitt.

“Advisors are likely aware that many of their wealthy clients scrambled in the last few months of 2012 to transition a significant amount of their wealth to heirs to take advantage of the generous estate tax exemption that was expected to disappear in 2013," Pirker and Schmitt write. “This transition may trigger the wake-up call that financial advisors need to focus on their own succession planning.”

Aite expects that advisors in 2013 will get more serious about finding their ideal successor and connecting them to their clients' children—“the key to their practice’s longevity.” A 2012 Aite survey of advisors found that 40% of practice owners surveyed wish to transition their practice to another party within 10 years, yet of advisors who are within two years of transitioning their practice to a successor, more than 40% lack a succession plan.

“Advisors who fail to plan for this transition run the risk of seeing a substantial portion of their clients leave the practice following the transition,” warn Pirker and Schmitt. To avoid such a fate, advisors should start planning early for a transition, the analysts say, noting that mergers-and-acquisitions consultants suggest starting to plan for an internal succession at least 10 years before the transition.

5) International Firms Reassess Global Operations

The good old days of asking a wealth management firm’s real estate department to find some office space in the financial district of a city abroad is essentially over for advisors, asserts Aite analyst Chris Thrappas.

“On the retreat internationally are wealth management firms with home markets in countries that had a difficult time during financial crisis, like the United States and United Kingdom,” Thrappas writes. “On the offensive internationally are firms with home markets in countries that have weathered the crisis reasonably well, like Canada, or must do so to survive in the new era of financial services, like Switzerland.”

6) Family Offices Move Down-Market to HNWIs From Ultra-HNWIs

External asset managers, who sometimes bill themselves as financial intermediaries or independent wealth managers, have traditionally served ultrahigh-net-worth clients with more than $30 million in investable assets through a family office investment vehicle. Now, Thrappas says, this investment management model is moving down-market toward the high-net-worth client segment of $1 million or more in investable assets.

“While some of the ancillary services associated with family offices may not be provided for clients below this level of assets, this investment management model has been moving down-market … and it is expected to grow further globally in 2013,” he predicts.

7) Engaging the Active Trader

With stock trading volume and net retail deposits into stocks expected to continue their decline, the holy grail for online brokerage firms is engaging the active trader who places at least three trades a month, according to Aite analyst Javier Paz.

Such traders “are a diverse bunch of mostly younger-than-40 urbanites with the common denominator that they are not afraid to push the ‘eject’ button when an investment firm is unable to meet their needs,” Paz writes. “For 2013, we predict that online brokerage firms searching for these holy grail traders will expand their asset class offering to include foreign exchange and options trading.”

Online brokerage firms including Charles Schwab, E-Trade, TD Ameritrade, and Fidelity have traditionally focused on the casual stock trader who trades less than 36 times per year and have largely disregarded the views of active traders, says Paz. But he believes that the tide is shifting, and large online brokerage firms have little choice but to compete for the active-trader business in 2013.

8) Cloud-Based Trading

During Superstorm Sandy, Knight Capital had to ask its clients to temporarily route trades to other destinations, and this dilemma lends insight into the questionable practice of housing “mission-critical” trading operations internally rather than in the cloud, Aite’s Paz argues.

In 2013, he says, trading ops will start moving to the cloud at a faster pace. Already, more than $200 billion of notional FX volume transacts collectively at cloud-based solutions from large brokerage technology firms such as Integral and Currenex, Paz notes.

“Firms like Equinix, Savvis and Interxion, in turn, hope to make their data centers the most complete ecosystem of capital market participants (exchanges, bank trading engines, broker-dealers, buy-side players, software vendors and market data providers), all in close-enough physical proximity to be cost-effectively cross-connected on an on-demand, bespoke basis,” Paz writes.

9) U.S. Politics Still Matter

After Obama’s re-election, Congress averted the worst potential effects of the fiscal cliff due to last-minute negotiations between Vice President Joe Biden and Senate Minority Leader Mitch McConnell. Obama’s second term will translate to a continuation of Dodd-Frank Act policies and less regulatory uncertainty, says Aite analyst Paz.

The choice of Jacob Lew as the next Treasury secretary is “a safe choice,” Paz writes, while change at the helm of the Commodity Futures Trading Commission could take place, “though it is more likely that Obama will ask the combative (and much disliked by the industry) Gary Gensler to serve a second term.” As for who becomes the next head of the Federal Reserve, Paz picks incumbent Ben Bernanke.

Looking at the IRS and taxes, Paz writes: “The partial bargain contained in the American Taxpayer Relief Act of 2012 has introduced a strong theme for wealth managers to engage their client base this year: tax policy changes. With these changes impacting income tax rates, estate taxes, capital gains rates and exemptions, investors will seek to understand the changes, evaluate their portfolios and take steps to minimize the tax impact. More likely than not, the capital markets industry will spend a good part of Q1 2013 analyzing the changes and of the next two to three quarters issuing recommendations that should lead to substantial portfolio realignment and hefty levels of securities trading.”

10) Growing Popularity of Technology

Advisors may have shunned technology in the past when conversing with clients, but that practice is giving way as financial planning tools have become easier to use and more accessible across a number of devices and networks, says Schmitt.

“At several of the largest wealth management firms, advisors have recently begun to benefit from new advisor financial planning tools, which can be used in collaboration with clients and accessed by clients online through their client sites for ‘always-on’ connectivity to their financial plan,” Schmitt writes.

Raymond James, for example, has actively promoted its recent deployment of Goal Planning and Monitoring, powered by MoneyGuidePro, to allow advisors and their clients multiple levels of planning via the customer relationship management, or CRM, platform.